Real estate investment is a type of investment with low risk, which includes the purchase, sale, rental, and management of real estate for profit. Real estate investment is one of the most important investment tools. Real estate investment, which can vary according to time and economic situation, is a generally profitable investment method. Investing in real estate preserves equity and prevents depreciation. It also provides rental income to increase financial resources. Housing, land, commercial real estate, and field are basic real estate investment instruments.
Calculating and investigating whether the investment vehicle will provide maximum or minimum benefit minimizes all possible risks. The risks that may be encountered in real estate investment are structural, environmental, financial, legal, management, insecurity, inflation, liquidity, and unpredictable costs. Making the right investment is one of the ways to eliminate these risks. A correct investment is achieved by managing the risks correctly.
There are some important things to do for the correct management of risks. In the first place, it should be determined how much return it will have compared to other investment instruments, both on a global and local scale, at the place and time where the real estate will be built. The high rate of return may also contain some risks. As a basic principle, after identifying the existing risks, it is to take measures against them. This is a behavior that expresses risk management. When this is done, not only a real estate is bought, but a real estate investment and a successful investment risk management are made.
- Structural Risk
- Environmental Risk
- Financial Risk
- Legal Risk
- Management Risk
- Insecurity Risk
- Inflation Risk
- Liquidity Risk
- Unpredictable Costs Risk
1. Structural Risk
Structural risk is more of a concern to buyers and users of real estate. It is also a type of risk that should be taken into account by financiers. It poses a risk for the continuation of the future income generation capability of real estates that are physically old and functionally worn out. At the same time, the visual modification of the building does not eliminate the structural risk. It should not be ignored that the structure wears out over time.
2. Environmental Risk
Supply-demand balance is one of the most important factors in the process from the beginning to the end of the investment. The risk that the investment to be made will remain idle above the demand in the market reveals the importance of feasibility. Speaking independently of the function, it is very important to invest in the right concept, in the right location, and at the right time. In particular, the wrong location brings with it the greatest risks. Choosing the right location is everything in real estate investment. Along with the location, it is also necessary to evaluate risks such as environmental and crime rates together.
3. Financial Risk
Financial risk is one of the most important risks. Because it is a risk that can trigger all other risks, it requires risk management that needs attention. Financing risk refers both to the lender’s bankability of the property and to the investor’s borrowing capacity. It is very important to know the borrowing capacity at the beginning to avoid any financing gap after the commitment is made. Because the level of financing risk depends on knowing this. If this is known, there will be no unforeseen financing gap. Another factor to be considered in the management of financial risk are that the investor has easy financing opportunities. In other words, the easy-to-procedure and cheap financing capacity reduces financial risk.
4. Legal Risk
In real estate investments, there are risks in the financial and real estate markets, as well as risks in the real estate itself. Especially in building investments, it is important that the investment real estate fulfills the legal requirements and has documents such as building permits and occupancy permits. However, the annotations restricting ownership on the title deed records of the real estate form the basis of the risks that need to be examined and managed before making a real estate investment. It will be beneficial to direct the investment by evaluating the land investments according to the zoning plan, in order not to encounter any surprises in the future. In addition, there are risks in the processes of permitting and starting the construction after the land investments.
5. Management Risk
Management risk can be explained primarily depending on the risk of the sales process. Elimination of risk in the sales process is achieved with the success of a correct marketing and pricing strategy. Any prolongation in the sales process will negatively affect the conversion of the investment into cash and create a risk to the success of the investment. That’s why timing is important. The investor ends his risks only after making his investment and converting his investment into cash. At this point, the need to manage management risk emerges. After the sales process risk is zeroed, then the management risk becomes manageable. Sites or commercial areas with good management are often easy to sell to a third party and can even be sold at prices higher than the market value. At the same time, it is possible to directly affect the value of the real estate positively by paying attention to the factors such as the nature of the tenant/brand mix in its content and not being vacant for a long time.
What is The Risk Protection Method in Real Estate Investment?
Although real estate investing is a relatively safe and profitable investment, it has certain risks. The basic principle in managing these risks is to determine the risks, make the right choices according to the nature of the risks identified, and follow the process dynamically.
The real estate market has continued to grow in recent years and has a positive trend. However, there may be ups and downs depending on economic conditions. For this reason, real estate investors should always be aware of the state of the market economy and try to predict in which direction the real estate market will change. Thus, it will be much easier to decide whether or not to buy an investment property at a given time is a good investment decision. It would be wise to start eliminating, reducing, and managing risks by paying attention to this issue first.
Poor location poses a serious risk to real estate investment. It also sets a barrier in front of future expectations in investment. Choosing a bad location opens the way for an unsuccessful investment. An example of a bad location would be a place with high crime rates. Another example is a place where services are disrupted. It is possible to multiply such examples. At this point, the second method is to investigate the location and to determine whether there are any negativities related to the location. Thus, it is avoided to invest in the wrong place. It is useful to be versatile in this regard. For example, a real estate or land that is in a very good position in its current state brings with it the prediction that it will lose value in the future due to a negative development in that region. Therefore, doing short research for the future will protect you from risk.
Another step in hedging risks is the precaution to be taken against negative cash flow. Negative cash flow risk arises when a real estate investor buys investment properties without first doing a real estate market analysis. Therefore, the best way to mitigate this risk is to accurately calculate income and expenses before purchasing and to make sure that the rental property is in a location with positive cash flow to ensure a high return on investment.
One of the important risks in real estate investing is purchasing a property with serious hidden structural problems that increase the possibility of unexpected repair and maintenance costs. Buying an investment property does not automatically guarantee 100% occupancy and quick profits. In real estate investing, an empty property is a very important risk as it can create negative cash flow. To avoid this risk, real estate investors should prefer good locations with high demand. Another step of hedging methods is to avoid the risk of bad tenants. To avoid the risk of becoming bad tenants, it is necessary to carefully select quality tenants. Checking the references by requesting the contact information of the previous landlord, and requesting documents within the framework of legal rights are the minimum necessary protection measures.
Real estate investors need to perform a comprehensive real estate market analysis in addition to rental real estate analysis to avoid risks. This includes studying market economics, property inspection, calculation of expected costs, and the like. It indicates when, where and how much investment should be made, and ultimately protects them against big losses.
Can Property Management Service be Obtained to Avoid Investment Risks?
Yes, the property management service is essential. Property management refers to the surveillance and monitoring of residential, commercial, or industrial real estate by a third-party contractor. Property managers take responsibility for daily repairs and ongoing maintenance, safety, and maintenance of properties. They often work for investment property owners such as apartment and condominium complexes, private home communities, shopping malls, and industrial parks. Their job is to manage the routine tasks delegated to them by their owners and to preserve the value of the properties they manage while generating income.
A property manager’s responsibilities usually include the following:
- Screening potential tenants
- Preparation and renewal of lease agreements on behalf of property owners
- Collect rent
- Maintaining properties, including landscaping and snow removal
- Necessary repairs to real estate
- Establishing and tracking budgets for property maintenance
Some owners are only concerned with owning rental properties and making a profit from them. When this is the case, they need professional real estate managers. Owners who participate in affordable housing programs and projects tend to use property management services because their rental properties are subject to complex, specialized guidelines.
Where to get Property Management Service?
A real estate professional who provides this service for a fee is called a property manager. The goal of a property manager specializing in property management is to make investment properties most profitable for the property owner. Thanks to the technology it has developed, Realty Group brings property managers together with property owners and tenants on a common online platform. Thus, property managers have the opportunity to easily provide all property management services. You could get property management services from our Realty Group professionals.
Is It Wise to Invest in Property?
Yes. Real estate investment is often a wise choice. If the value increases, in the long run, it may generate ongoing passive income and be a wise long-term investment. You may even include it in your overall strategy for beginning to generate wealth.
To start investing in real estate, you must, however, be prepared. For starters, you will need a sizeable down payment to get started in real estate investing. Buying a home, an apartment complex, or a piece of land might be pricey. You can evaluate whether buying real estate is the best option for you by using the information below.
Pay With Cash: Many financial professionals advise against taking out loans to buy investments. This is something you should take into account before buying an investment property. Even without rental revenue, you should be able to afford the mortgage payments if you can’t afford to buy the house outright.
Plan Out All of Your Expenses: When investing in real estate, the cost of taxes, utilities, upkeep, and repairs should all be considered. For things like maintenance and rent collection, it is frequently simpler to work through a rental firm. This will simplify owning a rental property despite the cost. It makes sense to use a firm, especially if you are short on time and can’t do all the duties at your property.
You must set the rental property’s pricing such that it completely covers all of these charges and other costs. Additionally, you must set aside the first few months’ worths of extra cash to pay for the property’s maintenance. Additionally, it’s critical to obtain property insurance (and plan for the cost).
Do thorough research on the property: You should properly investigate the land deed if you intend to buy land that you will later sell. Find out whether any new roads are anticipated to be built close to the land you are buying and think about how it will affect the value of the property. Make sure there aren’t any liens on the property as well. You could also want to take into account things like the nearby comparables, if the neighborhood is developing, and any outside variables that could impact the value of the property.
You should be able to decide whether to buy it as an investment once you have done your homework. Remember that there is always a risk involved with investing. On your investment, you could profit, but you might also incur a loss. Things might change, and a location you anticipated would appreciate could not do so, and vice versa.
Start Small: Some real estate investors start with a duplex or a house with a basement apartment, choosing to live in one while renting out the other. Although it’s a terrific method to begin started, bear in mind that you’ll be sharing a building with your renter.
One method to begin investing in real estate without a large initial investment is maybe through wholesale real estate. Additionally, when you create your budget, you should ensure that you can afford the whole monthly mortgage payment and yet maintain a comfortable standard of living in the absence of additional rent payments. As you become more acclimated to being a landlord and caring for an investment property, you may want to consider buying a larger property with more potential for income.